10 reasons to invest in mutual fund

Ratan Deep Saxena (Asstt Manager (Accounts & Finance))   (2998 Points)

06 October 2009  

A mutual fund is a pool of money that is managed by an Investment Company on behalf of investors. Management of fund is done by a professionally qualified Fund manager. The company raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. The fund manager uses the collected money to buy stocks, bonds and other securities according to specific investment objectives that have been established for the fund. In return for investments into the fund, you will receive units that represent your share in the total pool of fund.

In other words mutual funds raise money from public by selling shares of the fund like how a company sells its stock the public. The collected money will be invested in stocks, debts, money market instruments, etc. In most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily. Daily fluctuation is happening because major portion of the fund is invested in the stock market. The performance of the fund is purely depending upon the performance of the securities held by the fund. Diversification and professional money management are the major advantages of mutual fund. Mutual funds offer choice, liquidity, and convenience also charges a small fee on your investments.
Parties Involved
There are several parties involved in the organization and operation of a mutual fund such as;
·         Fund Manager
·         Portfolio Adviser
·         Principal Distributor
·         Custodian
·         Transfer Agent and Registrar
·         Auditor
·         Trustee
Fund Manager
Fund manager is the person who establishes and manages the mutual funds, markets them and manages their general administration
Portfolio Adviser
Portfolio Adviser is a professional money manager appointed by the Mutual Fund Manager. His duty is to direct the fund's investments. The Fund Manager also often acts as the Portfolio Adviser.
Principal Distributor
Principal Distributor coordinates the sale of Mutual Fund to investors. It can be either directly or through a network of registered dealers.
Custodian will be a bank or trust appointed by the Mutual Fund Manager to hold all of the securities owned by the fund.
Transfer Agent and Registrar
The group responsible for maintaining a list of all investors in the fund is called as Transfer Agent and Registrar.
Auditors are the independent accountants retained by the Mutual Fund Manager to audit each year, and report on the financial statements of the fund.
The entity that has title to the securities owned by the fund on behalf of the unit holders is called as Trustee.
Reason to chose Mutual Fund
Mutual Funds are the best option to multiply your wealth. You can go for Mutual fund with a minimum of Rs. 500. SIP (Systematic Investment Plan) gives you an opportunity to invest in Mutual Funds with a minimum monthly investment. It allows you to withdraw the money at any time; this helps you in ensuring the liquidity of your money. Why should one buy Mutual Fund? There are many reasons to buy a mutual fund. Below given are the top ten reasons that make Mutual Fund investment a feasible one.
1.    Enjoy the advantage of Diversification
2.    Gain the service of a professionally qualified Fund Manager
3.    Option to choose from a pool of funds
4.    Minimum initial investment
5.    SIP facility
6.    Automatic Reinvestment facility
7.    Greater Transparency
8.    High Liquidity
9.    Audited Track Records
10. Greater convenience
Enjoy the advantage of Diversification
Mutual Funds provide you the facility to diversify your portfolio. Diversification is an effective technique to minimise your risk. If you are investing directly in stock market, you have to buy different stocks of companies from different sectors to diversify your portfolio. The beauty of a mutual fund is that you can buy a mutual fund and has instant access to a hundreds of individual stocks or bonds. Otherwise, in order to diversify your portfolio, you might have to buy individual securities, which exposes you to more potential volatility with very high risk.
Gain the service of a professionally qualified Fund Manager
Investing in individual stocks and making profits are not an easy job. It requires detailed study and analysis to find out factors such as, in which stock to invest, how much amount to invest, when to invest, etc. Many investors don’t have the resources or the time to buy individual stocks. If you buy also, you should have a close eye on the stock, according to the market fluctuations you have to rearrange your portfolio. It not only takes resources, but a considerable amount of time also. In contrast, mutual fund managers and analysts wake up each morning dedicating their professional lives to conduct research and analyze current and potential holdings for their mutual fund. This makes Mutual Funds more Productive compared to other means of investments.
Option to choose from a pool of funds
A mutual fund comes in several types and styles. There are different types of Mutual Funds in the market. You can choose the fund as per your need.  Mutual funds allow you to invest in the market whether you believe in active portfolio management or passive management. Passively managed funds are those funds with no interference from a manager; these are called as passive funds and index mutual funds. The availability of different types of mutual funds allows you to build a diversified portfolio at low cost and without much complexity. Following are some of the major funds available in the market;
·         Asset allocation fund
·         Balanced fund
·         Bond fund
·         Equity fund
·         Fund of funds
·         Gilt fund
·         Growth fund
·         Hedge fund
·         Income fund
·         Index fund
·         Money market fund
·         Sector fund
·         Tax saving fund (ELSS) etc.
Minimum Initial Investment
Normally you can start a Mutual Fund investment with relatively less amount. Through SIP (Systematic Investment Program) you can invest in Mutual Funds by paying the money in installments. Many of the Mutual Fund companies are allowing the investors to start with a minimum investment of Rs. 500.
SIP Facility
It is easy to invest regularly in a mutual fund. Many mutual fund companies allow investors to get started in a mutual fund with as little as Rs. 500. This will help you in taking the advantage of Rupee Cost Averaging. As you are paying the money in installments, it will help you to reduce the risk of market fluctuations. For instance if you are investing a lump sum amount in Mutual Fund, during the time of market crash the value of entire investment will come down. But in case of SIP the units are credited to your account on a monthly basis. So you will be buying the units as per the current market price. This will help in reducing the investment risk.
Automatic Reinvestment facility
In Mutual Funds you might receive dividend on your investments. You can easily and automatically reinvest this dividends and capital gain into your mutual fund. There won’t be any charge or extra fees. This increased investment will help you to gain more returns.
Greater Transparency
Mutual fund holdings are publicly available (with some delays in reporting), which ensures that investors are getting what they pay for.
High Liquidity
Liquidity is an important factor that all people do consider while choosing an investment. Mutual Funds provide you high liquidity, whenever you want to exit from the fund, you can do it where as in investments like ULIPs, PPF, NSC, etc. you have lock-in-period. If you want to sell your mutual fund, the proceeds from the sale are available the day after you sell the mutual fund.
Audited Track Records
Mutual fund companies have to maintain performance records of mutual funds. All these funds must be audited for accuracy. Which helps the investors to trust the mutual fund’s declared returns.
Greater convenience
All the transactions related to mutual funds such as, buying and selling of shares, switching of funds, changing distribution options, and obtaining information can be done very easily by telephone, mail, or online.
Even though a fund's shareholder is relieved of the day-to-day tasks involved in researching, buying, and selling securities, an investor will still need to evaluate a mutual fund based on investment goals and risk tolerance before making a purchase decision. Investors should always read the prospectus carefully before investing in any mutual fund. While there are a crowd of investment options, a mutual fund can offer a simple, efficient way to invest for retirement, education or other financial goals.